2024-01-18 15:43:55 ET
Summary
- Toast, Inc., a fintech specializing in the restaurant industry, is experiencing rapid growth and profitability, though primarily reliant on payment processing revenues with razor-thin margins.
- Despite concerns about decelerating growth rates and doubts regarding long-term profitability, the overall investment outlook for Toast remains largely bullish.
- Toast's robust financial position, with approximately $1 billion in net cash, provides flexibility for innovation, market share growth, and potential strategic acquisitions.
Investment Thesis
Toast, Inc. ( TOST ) is a fintech offering, tailored to the restaurant industry. The business is growing at a rapid rate and becoming more profitable.
However, this investment thesis isn't blemish-free. In fact, the vast majority of its revenues are tied to its payment processing revenues, which means that the vast majority of its revenues will only have razor-thin margins.
Nevertheless, I remain mostly bullish on this stock's prospects and expect to see its share price climb to around $22 to $25 per share by mid-2025.
Rapid Recap
Back in November, in a bullish analysis , I said:
What is weighing on the stock is that Toast appears to be rapidly decelerating its revenue growth rates. And while I remain bullish on this stock, it's important to recognize that paying 80x forward EBITDA for Toast is a very high multiple.
Author's work on TOST
Indeed, as you can see above, the stock has been on a very volatile path this past year. Nevertheless, I still remain largely bullish on this stock, even while acknowledging that this stock has some pesky detractions.
Why Toast? Why Now?
Toast, a company focused on the restaurant industry, is poised for continued growth through its SaaS and fintech offerings. With a strong competitive program and efficient strategy, Toast has expanded its market presence. The company emphasizes product innovation, transparent pricing, and financial services like Toast Capital, fostering customer loyalty and revenue growth.
Toast's remarkable 34% year-over-year increase in total locations, approaching 100,000, reflects the high value placed on its offerings by customers. Recent product launches, such as the Toast Now app and solutions for different restaurant types, showcase the company's commitment to tailored solutions, enhancing operational efficiency.
The comprehensive platform integrates various restaurant management functions, solidifying Toast as a valuable technology partner for businesses seeking streamlined operations. Ongoing partnerships with both small and large restaurant groups highlight Toast's ability to cater to diverse market needs, maintaining a strong presence in the restaurant industry.
Revenue Growth Rates for 2024 of +30% CAGR
TOST revenue growth rates
I believe that Toast should grow its revenues by 30% or slightly more CAGR in 2024. However, as you'll see below, analysts following Toast are more timid in their outlook.
SA Premium
The analyst community is undoubtedly conservative in their views. But even so, there's the expectation that by the middle of this year, Toast's growth rates will have fizzled down to mid-20s%. This makes little sense to me, given that the comparables start to ease up, starting with Q2 2024.
What's more, as of Q3 2023, we know that location uptake is still increasing at 34% y/y, which goes a long way to reinforce my assertion that in 2024, Toast should still be delivering +30% CAGR on the topline.
Financial Position is Strong
During a bull market, investors rarely worry about a company's balance sheet. The only aspect investors appear to contemplate is the amount of upside the stock can deliver.
But when markets get shaky, all of a sudden investors become mightily focused on the downside. And yet, I believe that by investing in companies with strong balance sheets from the start, provides the company with the necessary flexibility throughout the business cycle.
More concretely, Toast holds approximately $1 billion of net cash, which equates to very approximately 10% of its market cap. This allows Toast to continue to be aggressive with its innovation and growing market share, as well as providing Toast with the flexibility to make some necessary bolt-on acquisitions to round out its offering.
Given this context, let's now discuss TOST's valuation.
TOST Stock Valuation -- 2x Forward Sales
The graphic above appears to be very volatile. However, in fact, upon closer inspection, you'll see that Toast's valuation has been moving around a very tight 2x to 3x forward P/Sales.
Note that Clover is part of Fiserv ( FI ), which makes the comparisons more opaque. Nevertheless, my point remains that Toast isn't being given a particularly high premium against its peer group.
The fact of the matter is that investors have their doubts about just how profitable Toast can ultimately be. For now, Toast's guidance for Q4 2024 points to about $15 million of EBITDA at the high end.
However, we have to keep in mind, that Toast's total revenues are made up of approximately 80% from its Financial technology solutions segment. This means that 80% of Toast's revenues are tied to payment processing revenues, which will never carry a significant premium on its stock.
Nevertheless, even with this consideration in mind, I still believe that this is an attractive investment opportunity. To be more specific, even without any sort of multiple expansion, I believe that this stock could grow in line with the growth in its revenues over the next 12 to 18 months.
Consequently, I believe that could reach more than $22 to $25 per share by mid-2025.
The Bottom Line
In conclusion, despite the challenges posed by Toast's dependence on razor-thin-margin payment processing revenues and the perceived deceleration in growth rates, my overall outlook remains largely bullish.
Toast's commitment to innovation, transparent pricing, and its strong position in the restaurant industry, reflected in its 34% year-over-year increase in total locations, underscores its potential for continued growth.
With a robust financial position, boasting approximately $1 billion in net cash, Toast has the flexibility to navigate market fluctuations and pursue strategic initiatives.
Although the analyst community may express more conservative views, I anticipate Toast's revenue growth rates to outperform expectations, potentially reaching over 30% CAGR in 2024.
With a valuation hovering around 2x to 3x forward P/Sales, even without multiple expansions, I believe Toast, Inc. presents an attractive investment opportunity, with the potential for its stock to climb to $22 to $25 per share by mid-2025.
For further details see:
Toast: Show Me Story, For Now